Innovation Footprints

What if . . . ?

Lab Notes

Update #01: White Paper | Towards A Supply Chain Operating System

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This update identifies areas of supply chain technology that will be sufficiently well served by existing relational database management systems, and enterprise resource planning systems. It also outlines areas of supply chain that distributed databases or ledgers are more suited for.

Lastly, to avoid confusion Nahum Goldmann’s contact information is provided at the end. I have been helping him think about this, but as I explained in the original post I am not personally an investor in DLTArray, nor is KEC Ventures an investor in DLTArray.

The update is based on feedback received from people who read the earlier version of the white paper.

Link to updated white paper: DLTSupplyChainPlatformWhitePaper20171017

This is an update to: White Paper | Towards A Supply Chain Operating System. That post has more background related to this.

Link to Nahum Goldmann bio: NGbio

Update #1: Tuesday, October 24, 2017 at 15:40 EST.

  • Rearrange links to reduce confusion about what people should read first, etc.

 

 

White Paper | Towards A Supply Chain Operating System

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Note: This article does not necessarily reflect the opinion of KEC Ventures, or of other members of the KEC Ventures team.

Supplying the world with nearly everything is an enormous and complex job: there are things to discuss. 

– Rose George (2013-08-13). Ninety Percent of Everything: Inside Shipping, the Invisible Industry That Puts Clothes on Your Back, Gas in Your Car, and Food on Your Plate (p. 142). Henry Holt and Co.. Kindle Edition.

In December 2014, I started monitoring a startup that I hoped KEC Ventures would invest in later, when they raise a round of financing. It was building and marketing compliance software for the freight trucking industry. I got to work learning about the trucking market. Ultimately, we failed to close that investment – despite our best efforts and the eagerness of our team to lead the round about a year after I first began to track their progress. I still feel let down by that founder . . . But, that’s a story for another time.

What I had learned about the trucking industry led me to ask myself; “If this is what’s happening in trucking, I wonder what the shipping industry is like?”

Some of what I have learned is chronicled here;

  1. Industry Study: Freight Trucking (#Startups)
  2. Updates – Industry Study: Freight Trucking (#Startups)
  3. Industry Study: Ocean Freight Shipping (#Startups)
  4. Updates – Industry Study: Ocean Freight Shipping (#Startups)

After I published the 4th article on that list, I got an email from a gentleman named Nahum Goldmann. I was intrigued by his email because even before I read his bio, I could tell that he knew A LOT about the topics I had been exploring – all the activities that have to be undertaken to get stuff from a supplier to the ultimate customer – supply chain.

So what exactly is supply chain? I will delve into that in another post more fully, but before then, perhaps this will help. A Supply Chain is;

A network of connected and interdependent organisations mutually and co-operatively working together to control, manage and improve the flow of materials and information from suppliers to end users.

– Martin Christopher, Logistics & Supply Chain Management: Creating Value-Adding Networks, 4th ed, Pearson Education Limited 2011, page 4.

Supply chain comprises;

  • Supply Chain Management (SCM),
  • Supply Chain Finance (SCF),
  • Supply Chain Logistics (SCL), and some people include
  • Supply Chain Execution (SCE).

The world is a supply chain.

I spoke with Nahum via skype on July 14, 2017. During the call we discussed a number of topics, among which was an observation I made in my update on the shipping industry; “One product that it appears the industry would gravitate towards is a system of record that connects all participants in the supply-chain, from end-to-end. This would be a platform into which various shipping industry data could be input, and other data can be obtained as outputs . . . Probably most input data would come from other platforms and data repositories, while output data would be fed to different counterparties based on their access rights and information requirements. It seems to me to be a problem suited for a cryptographically-secure, lightweight, multi-tenant, cloud-based ledger or database of some sort that can also provide anonymity for market participants who wish to maintain some level of secrecy from other counterparties with whom they interact through the platform. One can imagine that governments around the world, for example, would want special access rights in order to keep tabs on the movement of goods and people from one place to another.”

As luck would have it . . . I was describing an idea Nahum and other people with whom he has been collaborating have been working on.

Since then, I have helped him to distill their work into a white paper which you can read below. Also, there’s a link to Nahum’s bio.

A few days ago, on August 23 to be precise, I decided that I ought to start attending the supply chain meetup in New York City. To my utter shock, there was none. So I am fixing that. I have launched The New York Supply Chain Meetup (TNYSCM). Within 3 days, we had grown to 55 nodes. ((A member of TNYSCM is called a “node.”)) My vision is that TNYSCM will become a multidisciplinary community of practice that brings together the wide array of people and disciplines whose full participation it will take to build the global supply chain networks of the 21st century.

By Nahum’s estimates supply chain inefficiencies create a 15% – 20% drag on global GDP. The 2017 projection for global GDP is approximately $80 Trillion. This is a big problem. One of the things I will attempt to do in subsequent research is try to get gather more data on the economic and financial size of the problem.

But . . . Less I get distracted. Here’s the white paper. Also, here’s Nahum Goldmann’s bio. We want your input. My email is at the end of the whitepaper. Hopefully there will be more news to share soon.

For clarification; KEC Ventures is not yet an investor in Nahum’s startup – DLTArray. I am not a personal investor in DLTArray. My involvement is on a purely voluntary basis at this point and is based on my desire to see a large scale supply chain operating system that tightly integrates all the core components that make supply chain networks function come into existence. However, KEC Ventures is an investor in Gem, which is building an enterprise blockchain operating system, with supply chain applications.

Update #1: Sunday, August 27, 2017 at 06:38 EST.

  • Disclose investment relationships involving KEC Ventures, Gem, DLTArray.
  • Clarify my personal involvement

Notes On Early Stage Technology Investing; Art, Science, or Both?

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Conducting market research is an important part of the investment decision making process.
Conducting market research is an important part of the investment decision making process.

Often when I have asked other people this question I get a response that leaves me feeling dissatisfied. It seems most investors are compelled to take one side over the other, and, at least as far as the admittedly small sample  of investors I have asked this question are concerned, insufficient thought is given to the notion that perhaps early stage investing has elements that make it like art in some respects but like science in others.

I am writing these notes on early stage technology investing in order to clarify my own thinking on the subject. ((Let me know if you feel I have failed to attribute something appropriately. Tell me how to fix the error, and I will do so. I regret any mistakes in quoting from my sources.)) Ideally, once I am done I should have a clearer understanding of how my process for arriving at “yes” or “no” decisions should work, in what context certain steps can be truncated or even eliminated altogether, and the risks I am exposing our fund’s limited partners and myself to by the choices I make during the period over which I study and analyse an early stage startup that is an investment prospect.

To ensure we are on the same page, and thinking about the issues from the same starting point . . . first, some definitions.

Definition #1: What is a startup? A startup is a temporary organization built to search for the solution to a problem, and in the process to find a repeatable, scalable and profitable business model that is designed for incredibly fast growth. The defining characteristic of a startup is that of experimentation – in order to have a chance of survival every startup has to be good at performing the experiments that are necessary for the discovery of a successful business model. ((I am paraphrasing Steve Blank and Bob Dorf, and the definition they provide in their book The Startup Owner’s Manual: The Step-by-Step Guide for Building a Great Company. I have modified their definition with an element from a discussion in which Paul Graham, founder of Y Combinator discusses the startups that Y Combinator supports.)) As an investor, I hope that each early stage startup in which I have made an investment matures into a company.

Definition #2: What is art? 

The expression or application of human creative skill and imagination, typically in a visual form such as painting or sculpture, producing works to be appreciated primarily for their beauty or emotional power. ((http://www.oxforddictionaries.com/us/definition/american_english/art, acessed Jun 18th, 2015.))

In an article published in 2010, Marilina Maraviglia says:

This question pops up often, and with many answers. Many argue that art cannot be defined. We could go about this in several ways. Art is often considered the process or product of deliberately arranging elements in a way that appeals to the senses or emotions. It encompasses a diverse range of human activities, creations and ways of expression, including music, literature, film, sculpture and paintings. The meaning of art is explored in a branch of philosophy known as aesthetics. At least, that’s what Wikipedia claims.

Art is generally understood as any activity or product done by people with a communicative or aesthetic purpose – something that expresses an idea, an emotion or, more generally, a world view.

It is a component of culture, reflecting economic and social substrates in its design. It transmits ideas and values inherent in every culture across space and time. Its role changes through time, acquiring more of an aesthetic component here and a socio-educational function there. ((Marilina Maraviglia, What Do We Really Mean By Art? Accessed on Jun 18th, 2015 at http://www.smashingmagazine.com/2010/07/23/what-do-we-really-mean-by-art/))

Lastly, according to Tolstoy:

To evoke in oneself a feeling one has once experienced, and having evoked it in oneself, then, by means of movements, lines, colors, sounds, or forms expressed in words, so to transmit that feeling that others may experience the same feeling — this is the activity of art.

Art is a human activity consisting in this, that one man consciously, by means of certain external signs, hands on to others feelings he has lived through, and that other people are infected by these feelings and also experience them. ((Leo Tolstoy, Art and Sincereity. Accessed on Jun 18th, 2015 at http://denisdutton.com/tolstoy.htm))

I will attempt to extract a few key characteristics that I think qualify something as art on the basis of the preceding quotations. ((Adapted from: What is art? An Essay on 21st Century Art, Sylvia Hartmann. Accessed on Jun 18th at http://silviahartmann.com/art.php))

First, art is initially conceived or imagined entirely in the artist’s mind.

Second, the artist uses an artistic medium to transform what has been an intangible object in the artist’s mind into something tangible that other people can experience.

Third, art evokes a response from the people who experience it.

Finally, art is transformative in nature. Once experienced, art changes how we see and experience the world.

Definition #2: What is science? Conventional, and commonly held notions about what constitutes science often mistake and confuse the “pedagogy of science” with the “practice of science” . . . What does that mean precisely?

When we learn science we do so in a very formulaic manner. This makes sense, the first step in becoming a scientist is learning a sufficient amount of the body of knowledge that man has accumulated over time thanks to the work done by generations of scientists. The same is true for mathematics. That makes sense . . . Structure and process are important if the typical student of science is to make steady progress through the accumulated body of knowledge, until that student has built enough mastery of the subject to begin making new contributions to the knowledge we keep accumulating about the world. Out of necessity, the process of learning science adheres to the “scientific method” . . . It is linear, and simple, and provides structure for how one goes about mastering the accumulated knowledge of science. Generally, the process of teaching and learning science leaves little room for creativity. This leads many to develop and embrace the notion that the practice of science is an endeavor devoid of creativity. The way science is taught and learned also leads to the misconception that science is uniformly precise at every stage, and that it leads to conclusive answers to the questions that scientists investigate.

However, how one learns science is not the same as how one practices science. The following images attempt to illustrate that point.

Real Process of Science (1 of 3) . Image Credit: University of California Museum of Paleontology's Understanding Science
Real Process of Science (1 of 3). Image Credit: University of California Museum of Paleontology’s Understanding Science
Real Process of Science (2 of 3). Image Credit: University of California Museum of Paleontology's Understanding Science
Real Process of Science (2 of 3). Image Credit: University of California Museum of Paleontology’s Understanding Science
Real Process of Science (3 of 3). Image Credit: University of California Museum of Paleontology's Understanding Science
Real Process of Science (3 of 3). Image Credit: University of California Museum of Paleontology’s Understanding Science

In real-life, scientists:

  1. Create knowledge using an iterative process in which new advancements are built on prior work, in relatively small, incremental steps. The process starts with ideas, beliefs, or guesses . . . conceived entirely in the scientist’s mind. Old knowledge is revised, and modified based on new discoveries made possible by advancements in technology.
  2. Conduct research for which there’s no pre-determined outcome. For example, the evidence obtained from observation and experimentation might contradict the researcher’s best before-the-fact guesses and assumptions as well as established and accepted theory.
  3. Always begin with an idea that can be tested through observation, experimentation, measurement, and analysis. Observation, experimentation, measurement, and analysis – together, these constitute the scientist’s medium.
  4. Conduct experiments to test the ideas that they seek to investigate. The process of conducting experiments is the method by which they collect the necessary evidence that leads them to ultimately accept or reject the idea under investigation. To succeed at this they must be willing to reject conventional-wisdom, and scrutinize closely-held and cherished beliefs based on the evidence and observations of the experiments they perform.
  5. Typically work in collaboration with other scientists, or scientists-in-training. For example, as an undergraduate mathematics and physics double major at Connecticut College, I spent three years assisting Prof. Arlan W. Mantz with research on the temperature dependence of molecular absorption line widths and shapes using tunable semiconductor diode lasers. The nature of scientific collaboration can be direct or indirect.
  6. Often say that ” . . . further research needs to be conducted on this topic . . . ” This refrain seems to be a common feature of presentations in which scientists present their work. Yet, if one understands science as the pursuit of a deeper, nuanced, and increasingly sophisticated understanding of the laws that govern the natural world . . . That makes complete sense. Scientific research is ongoing in its search for better answers to questions that non-scientists might consider closed-to-debate.
  7. Transform our understanding of the laws of nature, and in so doing change the relationship that we each have with the world around us.

I can’t find a substantive difference between what we stereotypically call “art” and that which we stereotypically call “science” . . . Can you?

Does science evoke a response from the people who experience it? Each time I use one of the many objects that has become part of modern life, I am filled with awe at what scientists have accomplished. I will grant that there is one difference between “art” and “science”; namely it is that art is related to notions of aesthetic beauty. Yet, one could argue that there is aesthetic beauty in science as well.

Consider the equation:

Mass-Energy Equivalence
Mass-Energy Equivalence

Let’s set dogma aside, for a moment; Can one argue objectively that this equation is not an aesthetically pleasing way to express the relationship that exists between the energy and the mass of an object?

What are the implications for me as an early stage investor, if “art” and “the practice of science” are more alike than they are different?

Here is a scientist’s code of conduct according to the University of California Museum of Paleontology: ((“Participants in science behave scientifically.” Understanding Science. University of California Museum of Paleontology. Accessed on Jun 18th, 2015 at http://undsci.berkeley.edu/article/0_0_0/whatisscience_09))

  1. Pay attention to what other people have already done. Scientific knowledge is built cumulatively. If you want to discover exciting new things, you need to know what people have already discovered before you. This means that scientists study their fields extensively to understand the current state of knowledge.
  2. Expose your ideas to testing. Strive to describe and perform the tests that might suggest you are wrong and/or allow others to do so. This may seem like shooting yourself in the foot but is critical to the progress of science. Science aims to accurately understand the world, and if ideas are protected from testing, it’s impossible to figure out if they are accurate or inaccurate!
  3. Assimilate the evidence. Evidence is the ultimate arbiter of scientific ideas. Scientists are not free to ignore evidence. When faced with evidence contradicting his or her idea, a scientist may suspend judgment on that idea pending more tests, may revise or reject the idea, or may consider alternate ways to explain the evidence, but ultimately, scientific ideas are sustained by evidence and cannot be propped up if the evidence tears them down.
  4. Openly communicate ideas and tests to others. Communication is important for many reasons. If a scientist keeps knowledge to her- or himself, others cannot build upon those ideas, double-check the work, or devise new ways to test the ideas.
  5. Play fair: Act with scientific integrity. Hiding evidence, selectively reporting evidence, and faking data directly thwart science’s main goal — to construct accurate knowledge about the natural world. Hence, maintaining high standards of honesty, integrity, and objectivity is critical to science.
Image Credit: Tasha S. K. Aoaeh
Image Credit: Tasha S. K. Aoaeh

What are the risks I take if I cling to the notion that early stage investing is “all art” and “no science”? For one, I will not subject my own assumptions, hunches, guesses, biases, ideas, visions, opinions to the level of scrutiny to which they should be subjected. Worse yet, I might fail to subject other people’s ideas and assumptions to sufficient scrutiny and testing. Instead; I might rely on decision-making heuristics like “pattern-matching” and I might engage in “groupthink” or succumb to social-proof bias . . . I might fail to maintain a mind that is sufficiently open and flexible to recognise an early stage startup founder poised to transform the world because that founder does not fit my idea of what such a founder “looks like” . . . I might pass on a great startup investment for reasons that are completely irrelevant simply because I have failed to develop my own thinking and ideas about its prospects . . . I might fail to unlock promising new markets before the greatest returns have already been harvested by other early stage investors because I lacked enough curiosity and discipline to ask nuanced questions and challenge myself to acquire new knowledge and insights from other sources and other people – possibly people outside circles within which I am most comfortable . . . I might spend my career in early stage technology investing in a self-imposed exile to the land of piddling mediocrity.

I find none of those possible outcomes palatable; early stage investing is both an art and a science. The best early stage venture capitalists behave in keeping with that belief. It is their trade secret.

Science is Uncertain - Freeman Dyson
Science is Uncertain – Freeman Dyson

Further Reading

  1. The Pleasure (and Necessity) of Finding Things Out

Why Tech Startups Can Gain Competitive Advantage from Operations

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Hunter Walk’s blog post serves as the inspiration for this one. He points out that operations is key for startups operating in the on-demand economy. I want to pick up where he left off, and attempt to connect the dots. This post will answer the question “Why is operations important for tech startups?”

All else equal, and I know that is rarely true, operations marks the difference between an unsustainable competitive advantage and a sustainable competitive advantage. ((Any errors in appropriately citing my sources is entirely mine. Let me know what you object to, and how I might fix the problem. Any data in this post is only as reliable as the sources from which I obtained them.)) In order to understand the role of operations in determining the success or failure of a startup we must start with some definitions.

Definition #1: What is a startup? When I think of a startup I prefer to paraphrase the definition provided by Steve Blank and Bob Dorf in their book The Startup Owner’s Manual; A startup is a temporary organization built to search for the solution to a problem, and in the process to find a repeatable, scalable and profitable business model. The defining characteristic of a startup is that of experimentation – to have a chance at survival every startup has to be good at performing the experiments that are necessary for the discovery of a successful business model.

Definition #2: What is a company? A company is what a startup becomes once its search for a repeatable, scalable and profitable business model is complete. The inflection point between startup and company is characterized by the creation of the kind of infrastructure that we typically associate with large companies. For example, it becomes essential to have an HR organization where one was previously unnecessary. It become necessary to have a marketing and sales organization where that would have been hard to justify during the startup phase. Finally, it might also become necessary to build a sophisticated finance and accounting organization where previously there was not much to monitor or report, and someone with an unsophisticated understanding of accounting was adequate for the startup’s requirements, or the role might have been filled by someone working on a part-time basis. Basically, a startup becomes a company when its continued existence depends nearly equally on having the right organizational structures in place to ensure that the business is well managed as it does on having the right product or service to sell.

Definition #3: What is strategy? According to Fred Nickols, strategy is the accumulation of perspectives, positions, plans, patterns, tactics, choices, policies, concrete actions, decisions, thoughts, ideas, insights, experiences, goals, memories, perceptions and expectations that enable a company bridge the gap between the factors of production that the company controls and the output that it wishes to create and deliver to its customers. ((Fred Nickols, Strategy: Definitions & Meanings, 5/24/2012. Accessed online on Aug. 10th, 2014)) More succinctly, strategy is the qualitative essence of how a company does what it says it will do for its current and prospective customers. At a high level, strategy gives broad, abstract and general answers to the question; In what direction should we travel?

Definition#4: What is marketing? Marketing is the process by which the producer of a product or service creates demand for its output. It involves various modes of communication aimed at helping consumers interpret the value that the producer hopes to deliver to each consumer that buys the product or service. Marketing includes sales, advertising, public relations, and any other practice or activity whose ultimate goal is to build awareness in order to directly or indirectly facilitate sales. Marketing is what makes operations necessary. Without marketing, there would be no demand to satisfy.

Definition #5: What is operations? Operations is the set of activities in a startup or a company that takes inputs and turns them into the final product or service through which the value proposition is delivered to the market. Operations is focused on the process of transformation – transforming tangible and intangible inputs into something that the market is willing to pay for, at a cost level that enables the producer to earn a profit consistent with the accompanying strategy. Operations seeks to answer the question; How do we implement strategy?

In a fine dining restaurant operations is the process of transforming the knowledge and experience of every member of the restaurant’s staff into a consistently enjoyable and memorable dining experience. This process has to deliver results in tangible and intangible ways. Dishes have to be executed to a high degree of excellence, and the atmosphere, decor and service have to evoke emotions of pleasure, satisfaction and joy that meet or exceed diners’ expectations and cause them to dine at the restaurant as frequently as the restaurant’s operators wish. Each time a diner has a meal at the restaurant it must be memorable, in a good way.

In a general aviation company operations is the process that begins with finding out the traveler’s needs, matching those needs with a specific aircraft, and then safely transporting the traveler from the point of departure to the desired destination within a period of time acceptable to the traveler. Each time a traveler is transported from one place to another, that passenger must arrive safely. Also, the passenger should have enjoyed the trip enough to choose that charter company as frequently as its operators wish.

In a software startup operations is the process that begins with designing and creating the software, delivering it to users, and then ensuring that it is available whenever users or customers wish to use it. The experience of using the software has to be such that it is the first choice that users think of when they consider using software to facilitate that specific set of activities.

Once a strategic choice has been made, the process of transforming inputs into outputs is accomplished through capabilities within the organization. The diagram below shows the connection.

What is the connection between strategy, capabilities, and operations?
What is the connection between strategy, capabilities, and operations?

Strategy is concerned with answering the question; Where should we go? Operations is concerned with answering the question; How will we get there? The question around capabilities is; What do we have to be good at to get there? While all this is happening, processes that determine how a startup does its work are being developed. Processes matter because eventually a set of processes will lead to the development of a certain set of capabilities. As a result, it is essential to think about which capabilities are most critical to the startup’s survival before adopting one process over another. Eventually, as the startup matures it builds up a legacy of past choices that may limit or enhance the strategic options it can pursue in the future. Faced with a period of dramatic change in consumer or customer preferences, market structure, technological innovation, or regulations, flexibility is what separates winners from losers. The key attributes of a successful operations organization are:

    1. It must work hand in hand with strategy, marketing, finance, human resources, and every other area within the company.
    2. It must implement procedures and processes that lead to the right blend of capabilities within the company – for exploiting current opportunities, or resolving future threats.
    3. It must make infrastructure choices that protect the startup’s strategic flexibility to deal with current and unforeseen developments in the market.

Here are a few examples of how strategic and operational flexibility made the difference between startups that otherwise were neck-and-neck at some point in time – Friendster, Myspace, and Facebook.

What do you do when your users adopt your product for uses you did not intend or foresee? Facebook and Friendster were founded roughly around the same time. Friendster was founded in 2002, Facebook in 2004. Friendster reportedly grew to 3 million users within 3 months after it became generally available to the public in the United States. It soon became obvious that users were using Friendster for purposes its creators did not intend. For example they started creating various types of profile pages that were not tied to a real person – these became known as Fakesters. Friendster’s founders decided to prevent users from creating such profiles. Facebook experienced a similar behavior from its users. However, it took a different approach. It observed such behavior, learned from it and eventually enabled the behavior it observed. For example, users’ habit of creating profile pages for parties on college campuses eventually led to the development of the events feature on Facebook. In effect;

Facebook continuously watched how users used, and of course misused, their products by gathering usage data. These data guided their product development roadmap and helped ensure they were building features or making changes to their services that would encourage users to recommend the service to others (fan-out) and continue using it themselves (retention). ((Fisher, Michael; Abbott, Martin; Lyytinen, Kalle (2013-11-01). The Power of Customer Misbehavior: Drive Growth and Innovation by Learning from Your Customers (p. 103). Palgrave Macmillan. Kindle Edition.))

While we can not say precisely what motivations drove the opposite reactions Friendster and Facebook had to observed user behavior, we can guess that a need for operational simplicity motivated Friendster’s response. Locking down and restricting the number of ways in which its users could engage with its product made operations easier to manage. On the other hand, Facebook’s approach seems to reflect a philosophy that is more outward looking and user-centric. In other words, operations would adapt to ensure that Facebook’s product evolved to reflect the desires and wants expressed by its users in their day to day interaction with the product. In the process, Facebook developed capabilities that strengthened its strategy and so on and so forth. ((Twitter and Zynga are two more examples of cases in which product features, and operations have been adapted and modified on the basis of observed user behavior. Pinterest just updated its web and mobile apps with a messaging feature. From the outside it appears this update is a response to the observed behavior of its users.))

What do you do when your technology infrastructure appears to be unable to keep up with growth, and the accompanying demands? ((I am assuming here that initially the startup relies on outside service providers for technology that is not core to its business model.)) Sometimes things change in a really big way as a startup makes the transition from searching for a business model to scaling. Maybe its marketing and its product are so successful that existing infrastructure proves to be inadequate to meet the demands that the startup’s customers and users place on it. The startups that thrive and go on to become transformative companies adapt operations to deal with this reality. To do so they call on new capabilities that they have developed over the course of time. Google ((Jeff Dean(2008 Google I/O Session Videos and Slides); Underneath The Covers at Google: Current Systems and Future Directions. Accessed online, Aug. 15th 2014.)) and Facebook ((Jonathan Helliger; Building Efficient Data Centers with The Open Compute Project, Apr. 7th, 2011. Accessed online, Aug. 15th, 2014.)) provide examples. They both realized that the off-the-shelf server hardware that they were relying on to run their operations were not necessarily designed to handle the massive amounts of data that their unique business models require them to each deliver to their users and customers daily. As a result they have modified their operations so that they now develop, design and build their own server infrastructure. ((Jon Brodkin; Who Needs HP and Dell. Facebook Now Designs All Its Own Servers, Feb. 14, 2013. Accessed online, Aug. 16, 2014.)) There are many benefits to be derived from this. For example; First, this practice saves them money by optimizing energy usage. Second, it ensures that their business runs smoothly and efficiently so that users and customers have an experience that is commensurate with the value propositions that Facebook and Google have made and the experience users and customers have come to expect. Third, this makes it more difficult for new competitors to compete directly with Facebook or Google in the core areas of their business. As a testament to the soundness of this approach, many other companies that rely on technology as a cornerstone of their business operations are moving towards the practice of building their own custom server and networking hardware and software. ((Netflix, Amazon and RackSpace are each reported to have adapted their operations to rely on custom designed server hardware. I assume there are others we do not yet know about. At one point SingTel, the huge Asian telecommunications company was thinking of building its own CDN instead of relying on providers like Akamai.))

Contrast the fate of Facebook with that of Myspace and Friendster. Remember that Friendster, Myspace and Facebook were founded in 2002, 2003, and 2004 respectively. At one point Myspace was the most visited social networking site in the world. It briefly overtook Google as the most visited website in the world. So What happened to Friendster and Myspace? I am certain there is more than one reason for their failure. However, reports in the press suggest that their inability to adapt the technology that was core to running their business played an important role in their loss of market leadership to Facebook, and their subsequent failure – they continued to rely on server hardware and software from original equipment manufacturers who build off-the shelf servers. Friendster reportedly slowed down as traffic to its website grew. ((Gary Rivlin; Wallflower at The Web Party, Oct. 15th, 2006. Accessed online, Aug. 16th, 2014.)) Similar observations are made about Myspace. ((Abel Avram; Debate: What’s The Reason for MySpace’s Decline?, Mar. 30, 2011. Accessed online, Aug. 16th, 2014.)) While we do not know the full details, we can deduce that operations at Friendster and Myspace did not mature to the the same extent that operations at Facebook had matured.

As these examples suggest, operations is critical to the survival of any entity that intends to grow to any substantial size by satisfying demand from a large number of customers or users. To succeed technology startups cannot make the mistake of treating operations like an unwanted orphan stepchild. Rather, operations must have a seat at the table, and it must participate in a healthy exchange of ideas, information and opinions with strategy, marketing, finance and accounting, and HR about how each of those functions can work, individually and in concert, to accomplish the goal that the startup wishes to set for itself. Tech startups can ill afford to have operations start from the bottom.

 

 

A Note on Viral Marketing – Part I: What is it?

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Recently, I have had to immerse myself into studying about viral marketing in order to understand some challenges faced by startups I am studying or assisting as part of my responsibilities at work. This series of posts on Viral Marketing is my attempt to document some of what I have learned. ((Any errors in appropriately quoting my sources is entirely mine. Let me know what you object to, and how I might fix the problem. The data in this post is only as reliable as the sources from which I obtained them.))

The term “Viral Marketing” was popularized by some combination of Tim Draper, Steve Jurvetson and Jeffrey Rayport. Jeffrey Rayport used the term “v-marketing” in an article in Fast Company in December 1996/January 1997. ((Jeffrey Rayport, The Virus of Marketing, Fast Company, Dec 96/Jan 97. Accessed at FastCompany.com on Nov 28, 2013.)) Tim Draper and Steve Jurvetson of DFJ claim to have used the term “viral marketing” in their 1997 newsletter to investors in which they discussed DFJ’s investment in Netscape. Steve Jurvetson published a blog post discussing the term in May 2000. ((Steve Jurvetson, Recent Developments in The Evolution of Viral Marketing, May 1, 2000. Accessed at DFJ.com on Nov 28, 2013))

Viral marketing is a collection of marketing, advertising, and sales techniques designed to exploit the power of dense social networks in order to increase product or brand awareness, increase user adoption, and drive revenue growth. This practice is not new, evidence exists to suggest that it has been in use at least since the 1800s. ((See for example Infectious Texts: Modeling Text Reuse in Nineteenth-Century Newspapers. Also, Here’s How Memes Went Viral – In the 1800s.))

According to Steve Jurvetson viral marketing is:

  • Network-enhanced word of mouth,
  • Usage affiliated marketing – friends marketing to one another.

As a result of their belief in the power of viral marketing DFJ invested in several startups that used viral marketing techniques in order to grow; Hotmail, NetZero, Skype, eVite, SeeUthere, Keen/Inforocket, Homestead, Mimeo, and NetMind/Palm are startups he mentions in his blog post.

According to Jeffrey Rayport viral marketing is most successful when it:

  • Is stealthy in the way it approaches potential targets,
  • Offers something free but valuable upfront,
  • Exploits the natural behavior of members of its target communities,
  • Does not look like a virus – avoids eliciting initial negative reactions from its targets,
  • Exploits nodes with many weak ties in social networks rather than nodes with few strong ties,
  • Reaches the tipping point – the point at which future growth mimics the behavior of an epidemic.

So, for a startup short on time, cash, people and resources, how does one go about developing a product with viral characteristics? What makes products go viral? What mechanics enhance social transmission?

Recent research ((Berger, Jonah A. and Milkman, Katherine L., What Makes Online Content Viral? (December 25, 2009). Available at SSRN: http://ssrn.com/abstract=1528077 or http://dx.doi.org/10.2139/ssrn.1528077. Published in Journal of Marketing Research, Volume 49, Number 2, April 2012. Accessed Nov 28, 2013.)) suggests that digital content goes viral for a simple reason, when people care they share. More specifically, digital content that evokes positive emotions like amusement, awe, or excitement, is shared more than digital content that evokes negative emotions like anger, anxiety, frustration, or sadness. Social transmission and diffusion is governed by individual-level psychological and macro-level sociological factors. What does this mean? I am unlikely to share news about a digital product ((I am mainly interested in the application of this research to digital products, so I will use “content” and “product” interchangeably.)) that makes me happy, but that I feel is irrelevant to my community of friends. ((For example, language barriers could dissuade me from transmitting a particular product widely among my community of friends. Later we will see examples of viral marketing that involves targeting specific markets by LINE, a Japanese messaging app.)) People share in order to entertain their friends, but entertaining content that is surprising and interesting is more viral than content that is merely entertaining. People share in order to inform and educate others, but content that is also practical and positive is more viral than similar content that is merely informative.  The authors make some suggestions for people developing products that might benefit from viral growth:

  • Viral marketing campaigns designed to spread adoption of a digital product should evoke high-arousal emotions – content or relaxed consumers will share less than amused consumers. The controversies that surrounded Facemash helped to propel Facebook’s adoption. ((See for example; Katherine A. Kaplan, Facemash Creator Survives Ad Board, Harvard Crimson, November 19, 2003. Accessed on Nov 28, 2013. Note that the article attracted 216 comments. Facemash was Facebook’s predecessor.))

After creating the website, Zuckerberg forwarded the link to a few friends for advice. But the link was sent out on several campus group list-serves, and traffic skyrocketed. In the course of one day, the number of visitors quadrupled – by 10 p.m., the site had been visited by 450 people, who voted at least 22,000 times. 

– Extract from 2003 Harvard Crimson article about Facemash and Mark Zukerberg.

  • Viral marketing campaigns should focus less on targeting “influentials” and more on crafting content and creating features that will cause contagious social transmission.

Why do consumers talk about some products more than others, and what drives those conversations immediately and over time? Jonah Berger and Eric M. Schwartz have studied that question. ((Berger, Jonah A. and Schwartz, Eric M., What Do People Talk About? Drivers of Immediate and Ongoing Word-of-Mouth (April 25, 2011). Available at SSRN: http://ssrn.com/abstract=1822246. Published in Journal of Marketing Research, Volume 48, Number 5, October 2011. Accessed Nov 28, 2013.)) Their research suggests that:

  • Digital products that have higher public visibility with consumers, or that send consumers more frequent cues gain greater volumes of immediate, ongoing and overall word of mouth. ((It is not an accident that you generally open the apps on your smartphone or tablet that send you periodic prompts more frequently than those that do not.))
  • Promotional giveaways may boost word of mouth, and it is better to giveaway the product itself, or to giveaway non-product items like t-shirts. ((A brand-new, unread email, chat, or status update could be considered a reward that fits in this category.))
  • Simply being “more interesting” is not a sufficient quality to maintain word of mouth.
  • There is a difference between the factors that lead to online word of mouth and offline word of mouth sharing.

Here are some examples of products that have benefited from the power of viral marketing. ((I am gathering data in this Google Spreadsheets Document. If you have historical data you want to include in this effort please send it to me and I’ll add it to this document.))

  • Hotmail was introduced to the public in July 1996. By the end of the month it had 20,000 users. By the fourth month it had exceeded 100,000 users. Hotmail gained its 1,000,000th user in January 1997. It crossed the 12,000,000 user mark within 18 months, after spending only $500,000 on marketing. ((Data from Tony Lloyd, Are You Using The Dynamic Power of Viral Marketing? Accessed on Nov. 28, 2013.)) Hotmail gained 30 million users in 30 months. ((MSN Hotmail: From Zero to 30 Million Member in 30 Months, February 8th, 1999. Accessed at Microsoft PressPass on Nov. 28, 2013.  )) How did this growth occur? Tim Draper convinced Sabeer Bhatia and Jack Smith to include “Get your free email at Hotmail.” at the end of each email message sent through Hotmail. ((I found at least one source that claims that Hotmail had 400,000,000 users by December 1997.))
  • Napster was introduced to a group of 30 people in June 1999 by Shawn Fanning and Sean Parker. Within a week Napster had 15,000 users. Within a year it had acquired 25,000,000 users. It peaked at 80,000,000 users within 2 years of its release, and then started to lose users because of all the legal trouble it had started to attract. ((Alex Laird, The Napster Revolution. Accessed on Nov. 28, 2013))
  • Pinterest ((Unless noted monthly unique users are estimates developed by Steve Cheney, How To Make Your Startup Go Viral The Pinterest Way, TechCrunch, November 26, 2011. Accessed on Nov. 28, 2013. Click on the link to the Google Spreadsheet document.)) was launched to the public in March 2010 by Ben Silberman, Evan Sharp and Paul Sciarra. It had 2000 unique visitors in April 2010. By August 2010 it had 11,000 unique visitors. Pinterest’s monthly unique users grew at an average monthly rate of 54% in 2010, exceeding 80,000 in January 2011. The number of monthly unique users grew by an average monthly rate of 45% in 2011, and Pinterest crossed the 1,000,000 monthly unique users threshold in August 2011. It had 3,300,000 monthly unique visitors in November 2011. Monthly unique users grew to 27,323,489 in November 2012. ((Data for 2012 and 2013 is obtained from Compete.com’s Pinterest analytics dashboard.))  In May 2012, Mashable reported that Pinterest was beginning to focus more on international expansion. ((Lauren Indvik, Confirmed: Pinterest Raises $100 Million to Fund International Expansion,Mashable, May 16, 2012. Accessed on November 29, 2013.)) Pinterest’s US only unique users had risen to 31,549,541 for January 2013, and 32,835,276 in October. Semiocast reported that Pinterest has 70,000,000 global users worldwide in July 2013. ((Semiocast press release: Pinterest, July 10th, 2013.))
  • Facebook launched as theFacebook in February 2004. It had more than 650 registered users within the first week or so. Originally it was limited to students of Harvard. ((Alan J. Tabak, Hundreds Register for New Facebook Website, Facemash Creator Seeks New Reputation With Latest Online Project, Harvard Crimson, February 9th, 2004. Accessed on Nov. 28th, 2013.)) In May 2004 it expanded access to include Harvard, Columbia, Stanford and Yale. It hit the 1,000,000 user mark in December 2004. By May 2005 it had expanded to include more than 800 colleges, and in September 2005 it dropped “the” from theFacebook. Also in September 2005 it added high school networks, with addition of international schools following in October. Around that time it also launched Facebook Photos. Facebook’s user count hit 6,0000,000 in December 2005. It launched a product for mobile users in April 2006 and expanded to include work networks the following month. September 2006 was another big month for Facebook – it launched its news feed and mini-feed that month. It also expanded access so that anyone could become a registered user. Its registered users increased to 12,000,000 in December 2006. One year later it had 58,000,000 users. In March 2008 Facebook launched in German. Later that year it launched Facebook Chat, and also opened an office in Dublin. The “Like” button was introduced in February 2009. Facebook had 360,000,000 users in December 2009. A year later it had 608,000,000 users. In November 2011 Facebook had 845,000,000 users. By October 2012 Facebook had more than 1,000,000,000 registered, active users ((Data obtained from Facebook Timeline, accessed on Nov. 30, 2013)). The most recent update available Facebook has 1,267,191,915 users. ((Ellis Hamburger, 1.26 Billion Facebook Profiles Become A Clickable Monument To Humanity, The Verge, September 29, 2013. Accessed Nov. 29, 2013.))
  • This chart shows growth in users for LINE, the Japanese chat app. LINE is a particularly interesting case study because it has developed an international strategy ((Eric Pfanner, A Japanese Social App Contacts New Shores, New York Times, September 5, 2013. Accessed on Nov. 30, 2013)) that involves deliberate and targeted international launches. ((See for example; Japanese Messaging App LINE Comes To India. Launches TVCs Promoting Free Voice Chat And Stickers. and Social App Line targets UK after signing 260m users (including Sir Paul McCartney). There are other reports about LINE’s activities related to a launch in Spain.))

LINE app: number of registered users as of November 2013
You will find more statistics at Statista

  • The next chart shows growth in users for KakaoTalk, the Korean messaging app.

KakaoTalk: number of registered users 2010-2013
You will find more statistics at Statista

  • This last chart shows the quarterly user count for Linked in from Q1 2009 to Q3 2013.

Numbers of LinkedIn members as of 3rd quarter 2013
You will find more statistics at Statista

In the next post in this series I will examine a few case studies in a bit of detail to try to understand the specific techniques that have worked, and if possible to try to identify techniques that lead to failure.